When Starbucks came to town, coffee-bar owner Rand Smith struck back, using the one weapon his massive, rich competitor couldn't deploy
This morning holds unusual promise for the flagship Starbucks coffee bar in Portland, Maine. The air is cool but not unduly so. By 8:15 the sun is streaking through clouds over the harbor a few blocks to the east of the store at Exchange and Middle streets. The spacious cafÃ‰, Starbucks Corp.'s first in Maine, has been in business for the past year. It occupies the ground floor of a five-story building, one of the tallest and grandest in the Old Port district of restored brick storefronts.
Sure enough, the burnished brown door at 176 Middle Street is soon swinging open and closed as patrons arrive to buy coffee. They nestle down at tables--11 in all--immersed in coffee aromas, or head for the door, bearing white cups imprinted with the familiar green-and-black Starbucks logo.
But on this April day, something is out of kilter at the Old Port cafÃ‰.
Two broken windows--large double-panes--greet this morning's customers. Although neatly patched with plywood and duct tape, the windows are unmistakable eyesores. On the sidewalk outside, two men in black baseball caps are hailing the Starbucks customers and other passersby. "Good morning," they warble. "Have a good day." And as they hand out little chocolate drops and paper napkins, they sing out, "Support a Maine-owned-and-operated company." Like the men's caps, the paper napkins are imprinted with the black, red, and white logo of Maine Roasters Coffee.
Soon a police cruiser comes to a stop on Middle Street near the shorter of the two men. A police officer rolls down the window on the passenger's side. "Quit breaking the windows," he hollers to John DeMarco, general manager of Maine Roasters Coffee. "That's not funny," DeMarco replies. The officer smiles and the cruiser drives off.
The scene on Middle Street captures the mood of a tense, bizarre drama that's unfolding in Portland, as the ambitions of Maine Roasters Coffee collide with the arrival of Starbucks in the city. Like Starbucks, Maine Roasters is in the specialty-coffee business, albeit on a vastly lesser scale; a "flea on a dog's butt," is how the smaller company's founder and president, Rand Smith, puts it. To compete with Starbucks, Smith has devised a counterforce strategy. It rests on the simple premise that in a state with a proud tradition of small locally owned businesses, people will respond to a "buy Maine" appeal. With its more than 2,000 high-profile outlets in 31 states, and more than 200 in 11 foreign countries, Seattle-based Starbucks is easily cast in the role of the heavyweight corporate outsider muscling its way into Maine.
The broken windows seem only to confirm Smith's instincts. Within a month this spring, during which Starbucks opened two new stores in Portland, vandals smashed the windows of one Starbucks store on four different nights. In the first incident, on March 18, a drunken man staggered out of a bar and pitched a bottle through one of the windows. He was arrested and pleaded guilty. The four attacks, however, says Portland police chief Michael Chitwood, apparently "targeted" Starbucks and were perpetrated by more than one vandal.
Others in Portland have expressed their antipathy without violence. Also this spring, a small group of young people protested at one of the newly christened stores in the city. One sign read, "Starbucks get out of town." A scathing column in a local newspaper, Casco Bay Weekly, inveighed against Starbucks for "quietly destroying the character of downtowns" and funneling its profits "back to the greedy mother ship." In an interview with Inc., Donna Peterson, a Starbucks regional marketing manager in Boston, said that the company's investment and operations in Portland have strengthened the economy and that the company has contributed thousands of dollars in products or cash to a variety of the city's charities.
The national chain has run into flak in other cities--"a push back from activists who don't want Starbucks in their town," noted company chairman and CEO Howard Schultz in his 1997 memoir, Pour Your Heart into It. But the extent of anti-Starbucks feeling in Portland is "unique," according to Todd Zappala, who oversees the 11 Starbucks stores in New England that are north of Boston. Like a fresh-faced candidate swept into office by an anti-incumbent populist wave, Maine Roasters stands to benefit from the hostility toward Starbucks. At least that's Smith's plan.
Next to Starbucks, Maine Roasters may feel flea-size, but Smith dreams big. He was thinking big before he hit upon specialty coffee as his ticket to riches. He had been "very serious" about starting a chain of hot-dog stores that would have stretched from Cleveland to Florida, he recalls, but scratched the concept because he found it to be flawed for various business reasons.
When he opened the first Maine Roasters coffee bar, in Yarmouth, Maine, four years ago, Smith did so as part of a far-reaching master plan. "Long-term objectives include the realization of 30-plus units" in Maine, New Hampshire, and Massachusetts, he detailed in an early business plan. Starbucks didn't then loom as even a distant threat in Smith's eyes. Portland's population of 63,000, he reasoned, provided too small a market to interest the coffee-bar giant.
When Starbucks rolled out plans for its Old Port store, early last year, he was stunned. By then Smith had managed to open only two of his own units: the one in Yarmouth, which he had relocated from its original site in a weathered mill to a former gas station on busy Route 1; and his stylish Portland site, a small storefront on a street known for its honky-tonk bars. In June 1998 Smith added a diminutive waterfront store on Nantucket Island off the coast of Massachusetts; and this summer he'll be unveiling a fourth, in Boston's theater district.
Transplanting the Maine Roasters brand into Massachusetts proved to be a canny business decision; the Nantucket store quickly became a sales dynamo. Expanding into Massachusetts, however, put Smith in an awkward public-relations spot. From the standpoint of locally owned specialty-coffee stores in Massachusetts, Maine Roasters was suddenly in the same shoes as Starbucks. What about the virtue of local ownership when he crossed the state line?
Smith had meant to create the appearance of local ownership when he opened the new stores. Maine would remain the company headquarters. But Smith had planned to reword the logos on his cups and napkins to read Massachusetts Roasters Coffee and New Hampshire Roasters Coffee. He ultimately rejected that expedient as a logistical nightmare. In the end he simply decided to leave unresolved the seeming contradiction between what he was saying in Maine and doing in Massachusetts. "I'm not at ease with myself," Smith concedes.
And it is with unease--and increasing amazement--that Smith watches as Starbucks deepens its footprint in Portland. Of the two Starbucks stores inaugurated this past spring, one is in the Maine Mall, on the city's south side; the other in the historic Hay Building, in downtown Portland beyond the Old Port area. Starbucks hasn't yet determined how many locations it will eventually open in Maine, according to a company spokesperson, although the rumor in Portland is that Starbucks vendors received word to prepare for five to seven stores.
Whatever the eventual number, the whole of the investment Starbucks makes in Maine won't begin to deplete the company's coffers. Last year it had $1.3 billion in sales, $81 million of which was profit. Its presence has caused some shifting in Portland's coffee-bar market. Among the 10 or so specialty-coffee stores that were operating in the city a year ago, at least two--the Daily Fix and KoKo's--have shut down, partly because of the arrival of Starbucks, the former owners say, although in neither case was that the primary reason for their decision. Both former owners later signed on as managers of Starbucks stores in Portland.
Smith notes that business at his Portland store was up 20% for the first quarter of the year, compared with the same period in 1998, an increase he attributes "in large part" to the way Starbucks has broadened the local market by "educating" consumers about specialty coffees. Even as he describes his company's improving fortunes, his intensity suggests if not a man under siege, then a driven entrepreneur in a hurry.
Smith sits in a straight-backed wooden chair at a small conference table in the cinder-block warehouse that serves as his Portland-based headquarters and his company's coffee-bean roasting plant. With a ready smile and dimpled chin, the slender 34-year-old Smith has the finely chiseled features of a TV anchor--say, a young Tom Brokaw. He is casually dressed in a rumpled, buttoned-down white shirt and blue jeans.
In explaining why he has chosen the strategy of depicting Maine Roasters as the hometown alternative to Starbucks, Smith says: "I liken it to a professional sports franchise. It's people rooting for us instead of for Starbucks. The word Maine in our company name goes a long way. It's civic pride." Although Smith says that his company lost $2,000 in 1998 on revenues of "just over $1 million," he's projecting $1.6 million in sales this year and expects it to earn "significant money" in 1999. During the peak summer months, the payroll will swell to 65 employees from its off-season roster of about 30.
Smith recounts years of stress, of "wondering if I'm going to make the payroll," and of picking himself up after being rebuffed by bankers whom he had approached for loans. But this year he has worked out a financial-restructuring plan that invites private investors to underwrite individual stores. It could yield at least $1.5 million in fresh capital for Maine Roasters and, by funding at least five more store openings by the end of next year, propel the company toward Smith's 30-unit goal, says Bradford Mead, a managing partner in Delta Capital Group. A small investment-banking firm based in Avon, Conn., Delta Capital has agreed to seek investors for Maine Roasters, to which, according to Mead, it has made a "low six-figure" loan that can be converted to stock.
As Maine Roasters expands it will collide all the more with Starbucks, and in the process some of the tarnish from its big-chain rival could rub off. That, perversely, could deprive Maine Roasters of the underdog status on which it now relies for its competitive edge. Maine Roasters is vying with Starbucks for the same upscale office workers and tourists willing to shell out $2 for a cup of cappuccino.
Smith has no illusions that he can match the national chain's clout when it comes to--among other things--product diversity, advertising, and employee training. Hence he's making the best of his trump card: his local roots. No matter that the roots seem grafted on at times, as long as they boost Maine Roasters' marketing power vis-Ã-vis Starbucks. In February, Smith began assigning door duty to two employees one morning a week. The pair stand outside the doors of Starbucks and hand out chocolates and Maine Roasters coupons that offer two cups of coffee for the price of one. Smith's employees may wear black hats, but they are Maine guys--the good guys, in local terms. In other words, says Smith, he's hoping the Maine label will convey a message: "Trust us. We're in town with you."
Smith doesn't himself appear outside Starbucks to promote his buy-local alternative. "Too confrontational," he says. Still, he underscores the theme whenever he can. "It's Maine versus the national giant," he told the Portland Press Herald, the state's largest newspaper, early last year, when it became known that Starbucks would locate a store in Portland. The same argument sometimes figures in Smith's pitch to investors and prospective landlords.
Smith, ironically, isn't a Maine native and doesn't talk like one. He was born in Indianapolis and has lived in nine states and in Canada. He and his wife, Pauline Klek, graduated from Miami University in Oxford, Ohio, and about five years ago opted to live in Maine when they couldn't afford their first choice--Nantucket Island. (Klek moved to Nantucket in 1996 to work as a veterinarian, and Smith commutes there on weekends.) Early on, however, Smith did recognize the value of the word Maine in a brand name. After toying with the name Carpe Diem Coffee, he switched to Maine Roasters because, he says, "there's L.L. Bean and the image of a pine tree. Maine has a good image. It stands for high quality. There's good workmanship behind the product."
The quality of Smith's coffee arguably owes something to Maine, where his beans are roasted and some of them are brewed into coffee. Of course, none of the beans originate in Maine; they're all grown in faraway places like Costa Rica, Brazil, and Sumatra. And, it turns out, Maine Roasters' original business model isn't homegrown, either. Smith frankly acknowledges that it was largely cadged from Starbucks.
In early 1993, while entertaining the possibility of starting a specialty-coffee company, Smith devoted about three weeks' time to "hanging out" at Starbucks stores in Chicago. Nursing a cup of coffee for hours, he took note of the various stores' equipment and inventory, monitored training sessions for their employees, and tracked cash-register transactions in order to calculate the average purchase, writing all the information down on Starbucks napkins. One morning at 6, he parked a car opposite a Starbucks store in Lake Forest, Ill., and from that vantage point counted customers on a chrome-plated clicker. "After a few hours, the police came," Smith related, "and said there were some people who called, and they wanted to know what I was doing. I explained that I was counting customers, and it was a market-research project for myself." After the police left, Smith clicked away till 9 p.m.
Some of Smith's shrewd start-up tactics have stuck with him. When he posts employees outside a Starbucks store in Portland, he arms one with the chrome-plated clicker. As the employee hands out chocolates with one hand, he discreetly counts Starbucks customers with the other. From the number (the tally one early-morning hour was 67) Smith extrapolates the daily sales and profitability of a Starbucks store, according to formulas he has developed. The numbers will guide him in deciding where to open new Maine Roasters stores and how much he should invest in them to maximize profit.
Whether Smith's buy-local tactic is working is anybody's guess. On days when Maine Roasters employees take up their posts outside Starbucks, whole-bean coffee sales are 10 to 15 bags higher than normal at Smith's store a block and a half away, he says. And the company's Maine identity seems to attract news coverage, says Smith, who has been interviewed by TV reporters from Portland and Boston, and who's quoted occasionally in the Press Herald. All of which raises the Maine Roasters profile. "What can I tell you?" he says. "Sales are up."
And how do customers on the sidewalk react? On this morning in April, when DeMarco and his companion, Maine Roasters store manager Ryan Corliss, offer chocolates to the departing Starbucks customers and other passersby, most accept them. Several people show their approval by giving a thumbs-up. One well-groomed woman, Elizabeth Burns, a lawyer who works in a nearby office, objects vehemently. "I find it extremely impolite for you to stand outside a competing company and do this," she tells DeMarco. A few minutes later Ray Haversat, a manager at the Old Port Starbucks, remarks: "It's becoming a negative thing. Customers complain about the abuse they're getting when they try to get in the door."
The only way to reach Rand Smith late on a Friday afternoon is to call him on his cell phone. At about 2:30 p.m. he shoves off in his black 1998 Chevy Suburban. After a 200-mile ride from Portland to Hyannis, Mass., and a two-hour-and-15-minute ferry ride to Nantucket, he joins his wife for the weekend. (He reverses the journey on Sundays.) Not that the trip is all for fun; weekends are when he attends to the Maine Roasters on the island. Smith reckons that he works 70 to 80 hours a week and logs 5,000 miles a month in the Suburban, which has telephone messages stuffed into the steering wheel. It's a wearying life. "I tell my wife that by age 40, I want to be out," he says. "I mean that by then I either want Maine Roasters to be self-sustaining or I want to sell."
That makes his exit deadline October 5, 2004. To meet it Smith seems willing to bend further to the pragmatism that has defined his entrepreneurial career. His strategy of offering Maine coffee drinkers a local alternative, for example, goes only so far. In the back of his mind, Smith sees Starbucks as a potential buyer of Maine Roasters. At least, he says, "it's an option."
Joseph Rosenbloom is a senior editor at Inc.